How Low Will CARBO Ceramics Go?

Shares of CARBO Ceramics (NYS: CRR) hit a 52-week low today. Let's look at how it got here and whether clouds are ahead.

How it got hereIt was a meteoric rise for CARBO Ceramics as fracking became popular in the U.S., and the fall has been just as spectacular. Operations picked up quickly, and over the last five years the company has averaged 12.3% revenue growth with momentum only picking up in 2010 and 2011. But after a disappointing earnings report in the fourth quarter of 2011, the stock's downward spiral began and the fall hasn't stopped. Another disappointing earnings report after the first quarter has added fuel to the fire and put the company's growth into question.

For years, the expansion of fracking in the U.S. put CARBO Ceramics and other service providers like Halliburton (NYS: HAL) and Schlumberger (NYS: SLB) in a strong position. Revenue grew as more wells were drilled and the expansion looked like it would never end. But with the price of natural gas at record lows, the industry has started to cut back and multiples put on these stocks now seem unreasonable. When Chesapeake Energy (NYS: CHK) started a wave of cutbacks in drilling, suppliers took it on the chin and now growth has been put into question and stocks have fallen as a result.

But the fall in stock prices has made service companies more attractive from a valuation standpoint. P/E ratios have fallen, and given the growth that continues to take place in fracking, despite cutbacks, these stocks are becoming pretty cheap.

CARBO Ceramics

2.9

8.2%

17.8%

11.4

Halliburton

2.0

30.0%

14.2%

7.5

Schlumberger

2.6

21.7%

8.2%

11.6

Source: Yahoo! Finance.

What's next?Despite what the stock chart looks like, fracking is anything but dead in the U.S. The industry is shifting its focus from natural-gas plays to liquid-rich plays, which will take the air out of near-term earnings, but long-term fracking will still grow at a nice clip. There are also international opportunities to look forward to, which have barely begun to be tapped by the oil and gas industry.

Our CAPS members have given CARBO Ceramics a four-star rating (out of five), and 96 out of 106 All-Stars who have rated the stock think it will outperform the market. I tend to agree and think the lull oil and gas stocks are currently experiencing will pick up as the economy gains steam and more liquids plays are discovered around the world.

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